Monday, July 16, 2007

PIPEs in Europe

Private Placements in Public Equities (PIPEs) have represented $26bn worth of placements in the US so far this year but this method of transaction is relatively rare in European markets although the popularity is gaining.

PIPE transactions first gained favour in the 1990's among sophisticated investors in the US. In a PIPE transaction the company will sell newly issued securities to a small group of investors including hedge funds and institutional investors, and in some cases a small amount of accredited investors. The benefits to companies of the transaction are that compared to traditional offerings the PIPE provides a quicker raise for the company and an easier exit for investors than other private equity transactions. With the discounts available this method of investing can be lucrative for investors. So why are there not more of this type of financing in Europe?

The main reason for this is the perceived complicated structures of the various different State regulations throughout Europe and the potential pitfalls of takeover law and disclosures.

The main obstacles are:

1. Legal issue regarding shareholder approval of the issue of new shares and the board of directors authorisation to issue such shares.

Standard Memorandum and Articles of Association in England carry pre-emption rights for shareholders. Meaning that any newly issued shares in a secondary offering must be offerred to the existing shareholders first. Obviously such pre-emption would make the structuring, speed and confidentiality of a PIPE impossible to structure in a timely manner.

Given as a major barrier to structuring a PIPE, this situation in our experience, is generally overcome as most companies have some sort of 'dis-application entitlement' agreed at each AGM. This usually also takes into account the authorisation of the Board of Directors to issue a certain amount of shares.

The notification usually goes something like this:

"By ordinary resolution passed at an AGM of the Company held on XX XX XXXX:

(i) the Directors are generally and unconditionally authorised in accordance with Section 80 of the Act to exercise all the powers of the Company to allot relevant securities (within the meaning of Section 80(2) of the Act) up to the amount of the authorised but unissued share capital at the date of the resolution;

(ii) the Directors are authorised for a period of five years from the date of the resolution, pursuant to Section 95 of the Act to allot equity securities for cash pursuant to the authority referred to in sub-paragraph (i) above as if Section 89(1) of the Act (which confers on shareholders rights of pre-emption in respect of the allotment of equity securities which are, or are to be, paid up in cash other than by way of allotment to employees under an employees’ share scheme as defined in section 743 of the Act) did not apply to such allotment."

Most companies would have a limit as to the percentage of the company they could issue as new securities and most would carry a resolution that required it to be renewed each year. But if this is in affect (which in our experience it generally is) then this solves one problem in the structuring of a PIPE. It is also interesting to note that if a transaction is started while the provisions are in place, then that transaction will still be valid when the authority has lapsed as if it still existed.

The above, however, should be considered alongside the guidelines of the IPC (Investors Protection Committee) which is a trade body of Insurance companies and Pension funds. Although their guidelines are not law, as significant investors in larger companies they can carry lots of power to scupper unsuitable deals.

2. Take Over provisions

The takeover guidelines in the UK are to be considered when structuring a deal. An investor does not want to get into a position where a mandatory bid is required when the threshold for ownership is met. Basically if an investor achieves ownership of over 29.9% the rules trigger the mandatory bid situation, where a bid for the remaining shares in the company must be made.

Such rules have a number of benefits for companies and shareholders however they also protect the company from itself. In the 1990's the term 'Toxic PIPE' became the mantra of opponents of structured PIPEs. These structures were such that they had a 'reset' clause where if a share price declined to below the convertible written into the structure then the conversion price reset to a predetermined discount off the market price. As with many dot com businesses in the US, whose prices collapsed, suddenly the PIPE transactions were resetting and resetting until the company was, for all intents and purposes, owned by the PIPE investors.

Such a structure in the UK would trigger the provisions and cause the PIPE investor to have to make a mandatory bid. In affect, PIPE structures in a UK company would have a floor for the share price allowing conversion to only 29.9% of the company, avoiding such rules. Many have commented that this could be avoided by a syndicate of investors in the PIPE, however, this would be a 'concert party' which is essentially a group of connected investors working together, which for the rules counts as one.


The 'whitewash' provisions of the takeover guidelines allow for the shareholders to 'dis-apply' the takeover rules. generally this is done where the company is in trouble and requires financing to continue in business. If passed by the shareholders then the mandatory bid rule does not apply. However, should the investors wish to acquire further shares after the initial whitewash, another whitewash will need to be applied for and the investors concerned will not be allowed to exercises their vote in that whitewash.

If the issues above can be taken care of then structuring a PIPE transaction in the UK should be no more difficult than in the US. Although we are not experts on the US rules regarding restricted shares, it seems to us that the restricted shares rules are cumbersome and complicated for investors in the US, whereas there is no such rules on the AIM market.

Of course, there are restrictions but they are generally agreed between the company and the Nominated Advisor (NOMAD) under 'orderly market' situations. This is where an investor would agree to work with the NOMAD in order to sell shares obtained from the investment, the terms of which would be set out in a 'lock up' agreement.

There are many issues to consider when looking to structure a PIPE in the European markets and as a director of a listed company you should discuss the matter with your NOMAD and your legal team, however, we are confident that PIPEs will be more prevalent in the UK markets than they have been.

Our PIPE accounts are designed for sophisticated investors to enter this market and benefit from, what we see as, a win / win situation for companies and investors.

Saturday, July 14, 2007

Hedge Funds.. Pah... I want to be an Internet billionaire

Its Saturday and I have dispensed with all things stock market, bowler hatted and secret bank accountish for the weekend. I have sat out in the Sun for a few hours and even had a workout. Only problem is the lure of my computer was just too much.

It just sits there looking all cool and inviting (its an Acer Ferrari one) and I cannot resist its charms, even on my day off, so here I am. It may also have something to do with the fact that my son and wife are Eastenders fans and that is on. I would rather stick hot pokers in my eyes than watch it so the good old computer looked even better.

One of the things that has been fascinating me recently is looking at all the new business models that are coming online. Our business is involved with a technology business that is an acquisition vehicle for tech businesses, so I have been researching. Have you seen how many Wiki things are out there, its astonishing!

The community space sites are taking over the world and the guys who own them are becoming zillionaires. Then I came accross a site called 'Agloco' (I have no idea what it means) and had a look at what they are doing.

Essentially it is a toolbar that sits at the bottom of your screen and puts up small ads (which are one liners and unintrusive). Apparently, you get paid in shares for how long you are online and for how many people you refer and for how long they are online for (^%$ Stay with me here!!). So if it is sold for a zillion pounds it is split between the members. Personally I like the toolbar because it allows me to select Google without it defaulting to German all the time but I am easily pleased like that. I am sure the more tech savvy will find other gizmo's it has that are great...

On the other hand, I love the idea of free shares under any circumstances so I, obviously think this is a good idea. This is from their site:

"You accumulate hours in your account for your use of the Viewbar™ software, up to the maximum monthly hours (which is country-specific). These hours can be convertible into shares of AGLOCO™ stock. See below the country specific restrictions on conversion. You can also accumulate hours in your account for the usage of Viewbar™ by your direct referrals and extended referrals. You become eligible for the shares when your account reaches your country's minimum payout limit."

So please sign up below and lets make some free money! Or at least be part of what is, in my opinion, an interesting experiment.

If you want to have a go take a look here.

I do think that this may be a future boom in the industry. After all, how long is it going to be before consumers are just going to get very bored (or very anti) sites that make billions for their founders, but who are driven buy the users themselves (who essentially work for free).

This is why I am thinking of how I can exploit this keen insight and make myself a billion dollars doing which I can then share with all my lovely users.... hmmm not sure this is going to work...

Well... there is always the day job.

Tuesday, July 10, 2007

US Regulator Demands Access To Hedge Fund's Books,

The US Commodities And Futures Trading Commission (CFTC) has filed a contempt of court motion against the Bermuda-registered Lake Shore Asset Management Limited (LAM) in response to its refusal to allow CFTC staff investigate the fund's accounts, on the grounds of bank secrecy rules.

The CFTC’s motion was issued in response to LAM's violation of an ex parte statutory restraining order (SRO) freezing the fund's assets and prohibiting LAM from destroying or altering records, or refusing CFTC inspector's access to its books.

“The Commission’s ability to inspect books and records is a critical regulatory tool that allows us access to a registrant’s daily operations. When a CPO or CTA denies us that right of access, we must act swiftly to protect investors and important documents,” argued Gregory Mocek, the CFTC’s Director of Enforcement.

LAM, incorporated in Bermuda but with a Chicago office, is registered as a Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA). The CFTC's initial complaint alleges that LAM's Director, Laurence Rosenberg, a former chairman of the Chicago Mercantile Exchange, told the National Futures Association (NFA) that none of LAM’s business is conducted in Bermuda, and that all telephone calls to the Bermuda office are forwarded to an office in Toronto, Canada, where all trading is done and all books and records are maintained. However, according to the CFTC, the Toronto address is only a mail drop, not a business address.

The complaint further alleges that that LAM managed substantially less than claimed by Rosenberg. According to Rosenberg, LAM managed approximately 250 accounts and operated several commodity pools, with total assets of approximately $1 billion. Rosenberg initially provided the NFA with access to LAM’s protected web pages, but then blocked access after receiving advice from its lawyers that revealing the information could breach secrecy laws in Switzerland, where many clients are based. The NFA managed to find $466,710,761 in assets for all commodity pools and managed accounts, but the CFTC says that LAM has neither allowed CFTC staff to inspect and copy its books and records, nor has it produced the requested documents to the CFTC, as mandated by the court’s order. Because LAM is a registered commodity trading advisor (CTA) and commodity pool operator (CPO), the CFTC argues that it is entitled to inspect all of LAM’s books and records, not simply selected documents.

"LAM continues to hide behind unspecified Swiss “bank secrecy” laws and has only produced minimal and selective documents to CFTC staff," the Commission stated.

According to the Financial Times, LAM said last week that it has only one US client who has invested US$1 million into the fund, and that it would not reveal any details about its other clients.

The complaint also alleges that LAM’s principals, including Rosenberg, have made several inconsistent statements concerning assets in the pools and managed accounts, LAM’s ownership, US investors in the pools, and the location of its books and records. The FT reported that LAM admitted giving inaccurate statements, but that this was a mistake.

The matter is set for a status hearing on July 11, 2007.

by Glen Shapiro,, New York 10 July 2007

Monday, July 09, 2007

How to get in on the private equity IPO boom

We have had a number of emails asking the title question and the answer is fairly simple. Open an account and we will get you involved in he deals on a block basis. Through an account with us we are able to apply in large blocks for shares in IPO's which are then distributed across the accounts the ratios applied for. It really is as simple as that.

Not wishing to talk ourselves out of business here, but the question, perhaps, should be 'Do you really want to be involved in the first place?'. We are not making any judgement on any specific deal here, but investors should look at all the factors first.

1. Modus Operandi

For years we have seen big private equity firms buy public companies out and take them private, clean them up and then sell them on for profit. Seems like a simple plan akin to buying a house and doing it up, only bigger. However a number of these firms talk about the stock market like it does not reflect value and has harmed companies, we are then expected to believe that the floatation of the very same companies saying this is sensible?

2. Top of the market.

There is no doubt in my mind that some of the people running these firms are very clever and very smooth operators who have made vast amounts of money, billions in some cases, buy low and selling high. Now that they are effectively selling their companies to the market, have they decided that this is the perfect time to sell. I.e have we seen the top?

3. Motivation

Some of the founders of the businesses that we are seeing getting listed are going to make billions of dollars. They have done this buy being involved in their business and building them up over years. These are not the kind of businesses that you can just put in a CEO and hope that all will be well. They are not selling biscuits, cigarettes or Oreos here. These business are built around deal makers who can spot and opportunity, who thrive on the deal, more importantly these are the guys that give enough confidence to lenders to invest the huge sums of money that are required to do these deals. Will these guys still be there when there are shareholders meetings, SEC enquiries and all the daily drudgery of being a listed business?

4. Regulatory issue

We have already seen the private equity guys brought before senate committees and parliamentary hearings being questioned on their businesses. They have brought up tax issues, economic concerns, labour problems etc etc. As these business continue to do deals will we see a backlash like in the junk bond markets of the 1980's when investment bankers were put in prison and the industry effectively neutered?

5. Deal Flow

How many more multi billion dollar deals can be done? If you were a CEO of a company now, seeing your competitors being taken over and other CEO's being 'rationalised' wouldn't you be doing all you could to bring in outside consultants to look at your business and make suggestions on what a private equity firm would do if they took you over?

6. Structure

Remember also, that you would not be buying the deals that the firm are involved in, you would be buying the share of the management company and the profit flow from that. There is a difference.

The lists above is by no means exhaustive and we haven't put any of the positives, of which there are many, but it is important to think about whether or not you want to get involved rather than whether you can or not.

Thursday, July 05, 2007

Indirect Taxes - The price for low corporate tax

Competition between countries to attract and keep foreign investment is continuing to drive down corporate tax rates across the world, although governments are clawing back revenues by increasing indirect taxes, which may require companies to shoulder greater compliance and accounting costs.

This is according to KPMG's corporate and indirect tax survey 2007, which, for the first time, tracks both corporate and indirect tax rate trends, shedding light on the way in which overall tax revenue calculations made by governments affect the relationship between tax authorities and business.

KPMG concludes that indirect taxes appear to be playing an increasingly important role in the revenue-gathering strategies of many countries around the world. This is a difficult policy for governments to follow, says the report, because the link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services through higher prices, but the link between lower corporate tax rates and increased inward investment is less well understood. This has major implications for companies, their tax strategies and their accounting systems, the report noted.

Loughlin Hickey, Global Managing Partner of KPMG in the UK, observed that: "There is a clear tendency among nations in competition to attract and keep inward investment, to reduce their corporate tax rates and seek to make up the shortfall with increases in indirect taxes. This is rather than relying solely on growth brought about by corporate investment to expand this tax base. These tactics suggest that as well as attracting new investment, retaining current investments is a success in itself."

Hickey said that this was illustrated by Singapore, where Prime Minister Lee Hsien Loong had announced that a corporate tax cut would have to be paid for by an increase in GST. "If we bring down our corporate tax, every percentage point will cost us $400 million. It is big money," Lee told the Singapore Parliament last year, adding: "Therefore we must consider raising indirect taxes." Prime Minister Lee then went on to announce in his 2007 budget a 2% cut in corporate tax to 18% and a 2% increase in GST to 7%.

Rates of GST, VAT or its equivalent levy vary widely globally. The lowest rate is to be found in Aruba, where it is charged at 3%, the highest rates are to be found in Sweden, Denmark and Norway at 25%. On a regional basis, the average EU VAT rate at 19.5% is higher than the OECD average of 17.7%. The average rate across the Asia Pacific region is 10.8%, and in Latin America the average is 14.2%. However, KPMG says that it is difficult to draw direct comparisons between individual jurisdictions or regions because of the huge amount of special tax regimes and exceptions applied by many countries.

Across the OECD, the average rate of VAT/GST has held steady for the last six years, but the average corporate tax rate has drifted downwards by more than a tenth, from 31.4% to 27.8%. "So without changing rates, VAT/GST type taxes have become steadily more important as sources of revenue," the study noted.

In 2003, the last year for which figures are available, the average contribution of VAT/GST type taxes to government revenues across the OECD rose to 32.1%, having stayed between 31.2% and 31.7% for each of the previous five years. In some OECD countries, for example Mexico and Turkey, VAT/GST already contributed more than 50% to government budgets.

One of the advantages for governments of VAT/GST over corporate tax is that it provides a steady flow of revenues throughout the year rather than widely-spaced lump sums. However, this has major cost implications for companies which, effectively acting as a tax collector, must ensure that their accounting systems are up to date.

On the other hand, the survey shows that corporate tax rates are continuing to fall worldwide, but there are signs that this trend is slowing. Globally, average rates have decreased from 27.2% last year to 26.8% this year - significantly less than the major reductions seen in the late 1990s and early 2000s.

Of the 92 countries which participated in the KPMG survey, 18 reduced corporate tax rates, while two increased them. With such a small drop in average global rates, the report suggests that these adjustments were relatively slight, the major exception being Turkey, which slashed corporate tax by 10% to 20%. There were several significant reductions in the EU, where 17 out of the 27 member states cut rates, the largest being Bulgaria which decreased corporate tax by 5% to 10%. This took the EU average rate to 24%, 1.6% lower than last year. By comparison, the OECD average has fallen by less than 1% to 27.8%. Corporate tax cuts in India, Malaysia, and an increase of 2.5% in Sri Lanka leaves the Asia Pacific average broadly unchanged at 30%. Despite a material reduction of 8% in Aruba and smaller decreases in Columbia and the Dominican Republic, the Latin American average has fallen by just 0.5% to 28%.

"It would be interesting to conclude that corporate tax rates have reached their natural low points," noted Loughlin Hickey, "but it is clear that corporate tax rates in Europe are still being driven down, even as indirect taxes remain high."

However, while significant reductions are in the pipeline in the UK, Germany, Spain, Singapore and China and will be reflected in next year's report, Hickey concluded that: "It looks as if international tax competition has some way to go yet".

Article by

Wednesday, July 04, 2007

Swiss Super Regulator set for 2009

The Swiss parliament has approved plans for a new 'super regulator' which will bring the activities of three current regulatory bodies under one roof.

The new entity, to be known as the Federal Financial Market Supervisory Authority (Finma), will incorporate the roles currently played by the the Federal Banking Commission, the Federal Office of Private Insurance and the Money Laundering Control Authority (MLCA) and is due to begin operating from 2009 - one year later than planned.

The Swiss government designed the new regulator in response to criticism from international bodies of the shortcomings in the country's money laundering laws, and particularly the low number of money laundering reports being received by the MLCA compared with other major financial centres.

With 619 reports on suspicious financial transactions submitted to the Swiss Money Laundering Reporting Office Switzerland (MROS) in 2006, the number of reports received decreased 15.1%, from 729 in the previous year, according to the 9th MROS Annual Report 2006. As in the past few years, this decrease was due to a steady decline in the number of reports from the payment transaction services sector and in particular from the money transmitters, culminating in a substantial drop of 52.9% in 2006.

In its recent assessment of the Swiss economy, the International Monetary Fund (IMF) praised the Swiss government on its commitment to improving the supervision of the banking and financial sector, but raised concerns over the degree of autonomy that Finma will have from the government.

"The crucial importance of the Swiss financial sector to both the domestic economy and the global financial system — as well as its large size and increasing complexity — heighten the need for continued vigilance and for the highest standards of financial supervision," the report said. It went on to add that: "The Financial Market Supervisory Authority (FINMA), should be assured both financial and regulatory independence."

Speaking to Swissinfo, finance ministry spokesman Dieter Leutwyler rejected concerns over the independence of the new regulator.

"We do not share the concerns of the IMF in the field of independence, sanctions and costs of regulation," he said. "The independence of Finma is an important prerequisite for it to be able to fulfil its supervisory duties."

Swiss banking industry officials have expressed worries over the separation of powers within the new unitary authority, and have also questioned the overlap of powers and whether this will reduce the regulator's efficiency.

"There is a saying that if it ain't broke then don't fix it and I strongly believe in that. Regulation works very well in Switzerland so why change it?" Professor Hans Geiger of Zurich University's Swiss Banking Institute told swissinfo.

He added that the creation of Finma was, nevertheless, "absolutely necessary."

Tuesday, July 03, 2007

Buffet pays less tax than his cleaner....

Warren Buffet has blasted the US tax system because he says that he pays less tax on his earnings than his secretary or his cleaner. I take his point and if I was worth $53bn I wouldn't mind paying a little more tax either, I mean how many Lamborghini's can you own?

However, I worry that because we are living in the information age that reports of private equity billionaires and zillionaires will give the governments of this world more reason to raise taxes from entrepreneurs. If a tax system is weighted against business and its owners then employees and economies suffer.

It was Sir James Goldsmith, I believe , that wrote a book called 'The Trap'. This book was essentially aimed at the evils of globalisation. His basic philosophy was that if a company is able to move its facilities to a country with cheaper labour and taxation costs, then when costs in that country rise the company can just move onto the next cheap country leaving behind a ruined economy. Of course he was caned in the press and by 'economists' but wrote another book called 'The Response' putting his thoughts forward on each of the naysayers points.

Arguments could be made for or against whether he was right, but one thing that is for sure is that we ARE in a global economy now and governments, especially places like the UK, need to be very careful that taxes are kept right for the individual business owner, if not it is not difficult to move to a less 'taxing' jurisdiction. Indeed 'death and taxes' (well at least the personal 'taxes' part) is no longer a certainty, input 'offshore tax planning' into Google and you get 29,900 hits, basically business owners can access expertise in minutes. I did this same exercise years ago, pre-Internet, and ended up having to take a flight to Gibraltar to sort out my situation.

Of course there are extremes, we wrote about the 'Monaco Boys' and their zero tax lives. This may be taking the issue a little too far, but Warren, do us a favour, now that you have got your billions, don't encourage governments to create a situation where its more difficult for us to do.. thanks.